The Commodity Futures Trading Commission released an order Sept. 17 holding that Bitcoin and other virtual currencies are commodities and are subject to regulation under the Commodity Exchange Act and CFTC rules – a decision that is expected to have a major effect on the virtual currencies market.
The CFTC’s order also marks the first enforcement action against a Bitcoin options platform, although other federal regulatory entities, including the IRS and the Securities and Exchange Commission, have begun to build regulatory frameworks for cryptocurrencies.
The CFTC’s order finds that Coinflip Inc., d/b/a Derivabit, conducted commodity options transactions without registering as a swap execution facility or designated contract market, thereby violating the Commodity Exchange Act and its regulations. What constitutes a commodity is broad, the CFTC stated, and “Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”
Coinflip in July 2014 offered Bitcoin options contracts, which matched Bitcoin buyers and sellers through a bidding process. Bitcoins then were exchanged for dollars, with Coinflip calculating, facilitating, holding and transferring the payments. While the CFTC’s order did find that Coinflip had operated an unregistered exchange, the CFTC declined to determine whether the options trading itself that Coinflip carried out violated the Commodity Exchange Act.
Bitcoin options platforms like Coinflip should by now be well aware that their activities fall within the CFTC’s purview. CFTC Chairman Timothy Massad had previously stated in 2014 that derivative contracts for virtual currencies are within the CFTC’s responsibility. Last year, the CFTC also approved the first regulated Bitcoin derivatives exchange, TeraExchange.
If there was any remaining doubt as to whether Bitcoin derivatives must adhere to the Commodity Exchange Act and CFTC rules, the Coinflip order should remove it.